Pagegroup PLC

LSE:PAGE

Earnings Call Transcript 2019-Q1

[Operator]

Ladies and gentlemen, welcome to the PageGroup Q1 2019 Results Call. My name is Todd, and I'll be coordinating your call today. [Operator Instructions]I'll now hand over to today's host, Kelvin Stagg, to begin. Kelvin, please go ahead.

[Kelvin Stagg]

Good morning, everyone, and welcome to the PageGroup 2019 First Quarter Trading Update. I'm Kelvin Stagg, Chief Financial Officer; and I have with me Oliver Watson, Chief Operating Officer and Executive Board Director for North America, who will be available at the end of the call when we will answer any questions you may have. As I'm sure you're aware, on the 15th of March, we reported that Steve Ingham, our CEO, had an accident while skiing that resulted in a severe back injury and that we anticipated that this would lead to his absence from the group for a number of weeks. I can now give you a further update on Steve. The extent of Steve's injuries are now clearer. And as a result of the accident, he has been paralyzed below the waist, and this is expected to be permanent. He also has quite severe injuries to his ribs, which would take some time to mend. He remains in contact with the management team who have visited him in the hospital and are also staying in close touch via e-mail, Skype and phone.He's likely to be in hospital undergoing intensive occupational and physiotherapy for a period of around 4 months. During this time, the day-to-day operations of the group are being managed by the executive team, led by myself, with close oversight from Steve. Moving on, I will shortly present the headline numbers and the financial review before taking you through a regional review and a summary. Although I will not read it through, I'd just like to make reference to the legal formalities that are covered in the cautionary statement in the appendix of this presentation and which will also be available on our website following the presentation. The group delivered a record first quarter with gross profit of GBP 208.8 million. This represented constant currency growth of 11.7%. It was our sixth consecutive quarter of double-digit growth with growth in all 4 of our regions. 12 countries delivered growth of over 20%. Foreign exchange had a marginal negative impact during the quarter, which led to a lower reported gross profit growth rate of 11.2%. In monetary terms, foreign exchange movements decreased gross profit by around GBP 1 million. For the quarter, Michael Page grew 9.9% with stronger growth in Page Personnel, up 15.6%. We closed the quarter in a strong financial position with net cash of around GBP 76 million, down from GBP 91 million at the end of Q1 2018. This decrease is due largely to reduction in cash received from share option exercises, where GBP 10.5 million was received in Q1 last year compared to only GBP 250,000 in Q1 2019. At the end of March, the group had a record total of 6,157 fee earners and 1,685 operational support staff, maintaining our record fee earner to operational support staff ratio at 79:21. We now have a total record headcount of 7,842.I will now provide a more detailed financial review. In the first quarter, permanent recruitment grew 11.8% in constant currencies with temporary up 11.4%. This gave a ratio of permanent to temporary gross profit of 76:24, in line with Q1 last year. Our higher ratio of permanent recruitment reflects the mix of geographies and salary bands in which the group operates.In Latin America and large parts of Asia, for cultural reasons, the white collar temporary recruitment market has only recently emerged. In other markets, the permanent-to-temporary mix reflects the salary band in which we operate. In Michael Page, permanent recruitment represented 84% of gross profit. And in Page Personnel it was less, at 58%.Looking now at our gross profit by the disciplines in which we operate. Our original disciplines of Accounting and Financial Services represented 34% of the group. This was down from 35% in quarter 1 last year, reflecting the continuing success of our diversification strategy. This category grew 12.5%. Our Professional Services category was the fastest growing, representing 25% of the group and delivering growth of 16%. Within this, there were strong performances in our Healthcare, Secretarial and Technology disciplines. Our Technical discipline category, which represented 25% of the group, grew 13.5%, with another strong performance from Property & Construction, delivering growth of 37%. Finally, our Marketing, Sales and Retail disciplines, representing 16% of the group, grew by just 1.9%, reflecting the particularly challenging conditions in both Retail and Sales. Turning now to headcount. Having added 619 fee earners in 2018, additions in the first quarter slowed to 41. The additions were mainly into our Large, High Potential markets as well as those where we saw the strongest growth. By region, we added 46 in Asia Pacific, 16 in EMEA and 14 in the Americas. Headcount in the U.K. decreased by 35 through natural attrition.We can grow our headcount rapidly in a strong market or in more challenging conditions use our staff turnover to adjust our headcount lower and following our recent COO office appointment, have a greater focus on productivity and conversion. Operational support staff headcount increased by 29 in the quarter. These additions were mainly temporary in nature to support the implementation of our new Global Finance System, with rollouts in Latin America and Central and Northern Europe in the past couple of months. Our fee earners to operational support staff ratio was maintained at its record of 79:21. At the end of March, the group had a record 6,157 fee earners and 1,685 operational support staff, giving a record total headcount of 7,842. This fee earner headcount and gross profit chart illustrates both our gross profit at reported rates and our record fee earner headcount. The last column on the right shows the quarter in constant currencies to enable comparison with Q1 2018. I will now give a brief overview of our regional performances before presenting each region in more detail. Gross profit in the third quarter grew 11.7% in constant currencies, with growth in all 4 of our regions and 12 countries achieving growth of over 20%. Our Large, High Potential markets, representing 33% of the group, grew 19% collectively, with Germany, Latin America and the U.S. all delivering record quarters. Our largest region, Europe, Middle East and Africa, which represents 50% of the group, grew 11.4%. While many countries in this region performed strongly, the standout performance was from Germany, up 23%, the record performance in our Interim business which grew 27%. Asia Pacific, 18% of the group, delivered growth of 14.9% with strong performances in both Asia and Australasia. The U.K., 17% of the group, delivered a third consecutive quarter of marginal growth, up 1.7% despite continued Brexit-related uncertainty. The Americas, 15% of the group, was again our fastest-growing region, up 21.4% with particularly strong performances from Mexico and the U.S.Moving to each of our 4 regions and starting with the largest, Europe, Middle East and Africa. With a headcount of over 3,300, EMEA delivered its 19th consecutive quarter of double-digit gross profit growth, up 11.4%, a record quarter against the tough comparator of 18.2% in Q1 2018. Michael Page, 55% of EMEA, grew 10%, while Page Personnel grew 12%.In France, representing 16% of the group with over 700 fee earners, growth slowed to 8%. The gilets jaunes protests and political uncertainty have impacted confidence and consequently our investment in fee earners slowed to ensure a greater focus on productivity and conversion. Germany, 8% of the group, grew 23%, a record quarter. In our contracting business, Michael Page Interim has sustained investment in fee earner headcount of 42% year-on-year, delivered growth of 27%. Benelux grew 11%, the Netherlands up 12% and Belgium up 13%, delivering a record quarter. Southern Europe grew 12%. And Spain, 5% of the group, grew 9%, in line with its Q4 2018 growth rate, where a marginal decline in Catalonia was offset by strong growth elsewhere. Italy and Portugal also delivered record quarters, up 18% and 22%, respectively.The Middle East and Africa, which represented 2% of the group, grew 12%, driven by strong performance in the U.A.E., up 25%. Fee earner headcount grew by 16% in the quarter, mainly into Germany and the Netherlands.Our Asia Pacific region grew by 14.9%. In Asia, 74% of the region and 14% of group, we grew 16%, an eighth consecutive quarter of double-digit growth. In Greater China, one of our Large, High Potential markets, we grew 9%, slightly below our Q4 growth rate of 12%, with Mainland China continuing to be impacted by the ongoing uncertainty around safe trade tariffs. This has also led to reduced confidence in Hong Kong.Southeast Asia, another of our Large, High Potential markets, grew 11%, with a continued strong performance from Singapore, up 13%. Both Thailand and Vietnam, our 2 newest countries in Southeast Asia, continue to grow strongly. In Japan, our focus on both the Gaishikei and the Nikkei markets continued to bring success with growth of 34%. India, where we now have over 120 fee earners, delivered a standout performance, up 49%, a record quarter. Australasia, which represented 26% of Asia Pacific and 4% of the group, grew by 13% with a record performance from our Page Personnel brand. Overall, the region added 46 fee earners in the quarter with additions mainly into Australia and Japan, partially offset by small decline in Mainland China in response to the challenging market conditions. The U.K. delivered its third consecutive quarter of marginal growth despite Brexit and political uncertainty continuing to impact confidence. Although market sentiment remained weak, there were areas of good growth.In Page Personnel, which represented 1/4 of the U.K. and operates primarily in finance and business support, we delivered growth of 10%. However, Michael Page, which is focused on more senior opportunities, declined by 1%. All regions performed in line with the U.K. average. Fee earner headcount decreased by 35 in the quarter through natural attrition. Finally, to the Americas. With a headcount of over 1,300, this was our fastest-growing region, up 21.4% in the quarter. In North America, 9% of the group and 58% of the region, we grew 21%. The U.S., 93% of North America, grew 24% and delivered a record quarter with our Technical disciplines the strongest performing. Our strategy of diversification, both in terms of location and discipline, continued with notable performances in our regional offices in Boston, Chicago, Houston and Los Angeles.Latin America, 6% of the group and 42% of the region with a total headcount of over 800, grew 22%. Mexico, the largest country in the region, grew 33% and delivered a record quarter. Brazil continued to perform well, up 20%, recording a sixth consecutive quarter of double-digit growth. The other 4 countries, with combined headcount of over 300, grew 15% collectively with record performances from Argentina, Colombia and Peru. Fee earner headcount in the Americas increased by 14 in the quarter, mainly into Mexico and the U.S. I will now finish with a brief summary of our first quarter results. The group delivered another record gross profit performance with growth of 11.7% in constant currencies. We saw growth in all our 4 regions, and 12 countries achieved year-on-year growth of over 20%. We added 41 fee earners in the quarter as we invested in markets with the strongest growth, balanced by natural attrition elsewhere. We now have a record total headcount of 7,842. Our operational support staff headcount increased by 29, mainly to support the implementation of our new Global Finance System. As a result, our fee earner to operational support staff ratio was maintained at a record 79:21. Our flexible business model enables us to react quickly to changes in market conditions by adjusting our headcount. And following our recent COO office appointment, we have a greater focus on productivity and conversion. We will continue to focus on driving profitable growth while continuing our strategic investments towards our vision of 10,000 headcount, GBP 1 billion of gross profit and GBP 200 million to GBP 250 million of operating profit. Our financial position remains strong with net cash of around GBP 76 million. We are pleased with the group's performance in Q1 and at this early stage of the year, expect 2019 operating profit to be in line with consensus. Oliver and I will now be happy to take any questions you may have.

[Operator]

[Operator Instructions] And our first question today comes from Bilal Aziz from UBS.

[Bilal Aziz, Associate Director and Equity Research Analyst]

First and foremost, I just want to pass on best wishes to Steve and family. And secondly, 3 quick questions from my side. On France, apologies if you have missed -- if I missed it somewhere, but can you please update us the difference in growth between Page Personnel and Michael Page brands within that region? And secondly, across the group, can you please update us on sort of wage inflation trends you are seeing, particularly in Europe and if that's impacting your fee rates as well? And lastly, I appreciate it's very early on in the year to be talking about drop-through rates, but can you please remind us, within your bridge, what profit impact is purely coming from a reduction in IT costs this year?

[Kelvin Stagg]

Just finished scribbling those down. I think on the first point with Steve, I suspect that you've just done that because he's dialed into the call somewhere, so I assure you he will be pleased to have heard you say that. And I'll take those in slightly different order. Firstly, on wage inflation and particularly in Europe, we're not seeing massive wage inflation in any particular area. Our fee rates have been fairly static over a period of time. As you'll probably know, I mean, our fee rates don't move that much, so they tend to only move around 10% from peak to trough. So they are probably somewhere around 20% at the moment on average in Europe, and they've been fairly hard for the last few years. There will be pockets of wage inflation either in economies that are growing particularly strongly, such as in Germany. And there will also be pockets in certain disciplines, things particularly like digital marketing and the like, will have some wage inflation there. But in the economies where we have seen particularly strong wage inflation some time back, I would have said to you Barcelona before the challenges in Catalonia, and that certainly softened that market. I think in France, we were starting to see some wage inflation coming through, and that's probably dropping off a bit with the challenges around gilets jaunes at the moment. So I think, actually, the wage inflation is under relatively good control in Europe. On France, Michael Page France was up 8%, Page Personnel France was up 9% in the quarter, so very little really between the 2, and they're both making good progress and have done it through the quarter. And finally onto drop-through rates, we would expect drop-through rates to be somewhere in the low 20s, which is sort of where they've been previously. And the impact in terms of costs that we've had in previous years that are not coming through in the current year, we expect that to be about GBP 6 million. So that's largely the restructuring costs last year more in terms of building shared service centers in the likes of Singapore and in Buenos Aires and some of the costs around restructuring and moving people or redundancies in order to effect those. There were some costs that went through last year in terms of the move into the cloud, and some of those actually are carrying on in the current year. But the delta between the 2 in terms of overall transformation project savings is about GBP 6 million in the current year.

[Operator]

Our next question today comes from Paul Checketts from Barclays.

[Paul Daniel Alasdair Checketts, Director]

First, I'd just like to say, Steve, good luck with the recovery. I can only imagine that you have one of the most dedicated patients and real efforts to recuperate. And on -- from the question perspective, can I just return to France to a degree and China, Kelvin? So obviously, 2 big regions and the slowdown is being attributed to Paris and yellow vests. But can you just run through how it is -- how easy it is to isolate those impacts? And should those 2 situations move into a more favorable position, would you expect growth to rebound later in the year? And then the second question is on the drop-through again. I suppose if you've got the GBP 6 million cost saving, then the question is, why isn't drop-through better than it's been in previous years? Is there some sort of negative mix impact maybe from Page Personnel growing? That's the 2.

[Kelvin Stagg]

Yes, let me start then with France and China. So I think in both cases, we've seen a slightly slower growth rate in the first quarter than we did in the last quarter of last year. And actually, in both cases, that's really about the timing of when it happened in Q4. So the gilets jaunes protests started somewhere around the beginning of November. And actually, the trade tariff issues we saw didn't really come to light either until sort of November time. So we had 2 months' worth of slowdown in both of those markets last year. We've just had a full quarter this time. I think in terms of the French market, there are wide discussions going on at the moment around the future of the French social system and how that may happen and any impact that might have on social charges in France. And therefore, we expect that we will have an extended period of, not necessarily slowing, but slower growth while those processes work through. I think, therefore, what happens at the end of the year, if that was all sorted out quite quickly, there's no reason to think that it wouldn't come back at the end of the year. I think it's very much a slowing in the market as people are just looking around to take confidence on what the impact of any of those changes might have on companies in France. Again, looking to China, we're fairly comfortable that it is related to the trade tariffs. It's particularly in foreign multinationals and Chinese multinationals. Initially last year, purely within Mainland China, as this -- the first quarter has gone on, I think we've seen some of that contagion move in to Hong Kong. But it is specifically within those clients, and talking to those clients that is their concern. Depending on which piece of information you read, I know there was something this morning that talks about President Trump saying they might have some progress in 4 weeks. I don't know what that progress might be and what the impact of that might be. So it is possible that if there is a positive outcome to trade tariffs that we would then end up seeing a bit of a pickup later on in the year. But time will have to tell. Again, there's no reason to say that if things sorted themselves out and everybody got confidence, we wouldn't see a rebound later on in the year. But that's crystal ball and I'm not going to try and guess that. I think coming back onto the drop-through rate, I mean, our drop-through rates really last year were more in the range of about 20%. I think we'd like to see them moving up into about 25%, so somewhere around there, which will include some of the savings and some of the ongoing investments we're making this year. We've had a lot of progress so far this year in terms of rolling out our Global Finance System. It actually went live in Latin America in February. We went live in Northern Europe and Central Europe about 3 weeks ago. And so we've actually lined up to go live in our final sort of part of the world, which is Southern Europe and France, somewhere around the midyear. In terms of exactly which date, we're still trying to pin that one down. So there's a fair amount of cost going on around that. There's also a fair amount of cost in terms of the data center closedown. So whilst we've got a delta benefit of about GBP 6 million in the current year, we do still have some transformation costs from the current year which will, all things being well, fall away next year.

[Paul Daniel Alasdair Checketts, Director]

So the GBP 6 million is more of a gross number rather than an overall net number?

[Kelvin Stagg]

It's a gross number, yes, correct.

[Paul Daniel Alasdair Checketts, Director]

But what do you think the net number is?

[Kelvin Stagg]

It's probably GBP 3 million or GBP 4 million of that.

[Operator]

We now have a question from Matthew Lloyd from HSBC.

[Matthew Lloyd, Head of United Kingdom Small and Mid]

Just a couple of questions, really. One, I just wondered whether you've got any feel for sort of the nature of the market, what was strong? And particularly in Germany, I think a lot of people are very nervous about German slowing. Is that SMEs that are hiring? Is it low wage or high wage? Do you take any comfort in Europe from the pattern of hiring that you're seeing? Or does there -- is there anything that makes you a little bit more nervous about the outlook?

[Kelvin Stagg]

Maybe if I talk to Europe and Germany, and then I'll hand over to Olly who can talk to you about the U.K. and North America, slightly different parts of the world. I think within Europe largely, we continue to see positive forward KPIs. So in most of our markets, we are actually seeing strong job flow. We're seeing strong candidate flow. I think I was particularly pleased with the performance out of Italy. We were 18% in Italy. We're actually in the process of moving out of separate offices in Milan and into one combined office for Michael Page and Page Personnel. Milan is actually our biggest city by fee earners anywhere in the world. And we've seen previously, particularly in France when we moved all of our fee earners out of separate offices for Michael Page and Page Personnel, that we did get some synergies in terms of joint client visits, sharing of candidates at the margins between the 2 from joining those businesses together. So that's later to come in the year. We haven't really managed to do that yet, and they're still in the process of moving in. So generally, in Europe, it's been fine. In our German business, as you say, I mean, we are having great results out of Germany, 23% in total and 27% for our contracting business. The only thing I would say, we are a relatively small player in Germany compared to particularly one of the very, very large players out there. We've always been, therefore, in the SME market we came to the market somewhat late in contracting. And therefore, we have a very, very diverse client base. We mainly do IT, so we don't really do any Engineering. And we don't really have any exposure into the automotive or actually further down the automotive supply chain. So I can't sort of speak for anybody else and what they may be experiencing or not in the German market, but we find it particularly robust and strong. We actually had quite a pickup towards the end of the quarter in terms of high-level Michael Page perm jobs, and that was spread across most of our offices in Germany. And that would normally indicate a pretty robust market if people are investing in high levels senior people on a permanent basis. Europe, yes, so largely outside of what's a little bit of a slower trajectory we've already talked about in France, it's fine. I'll hand you over to Olly.

[Oliver Watson]

In North America, I think we've got probably one of the best recruitment markets I've seen for a while. All sectors performing strongly in all regions. New York, we're about 10% up, and all of our regional offices were between 40% and 50% up and growing very quickly. And that includes all the areas that we primarily focus on, like Property & Construction, which is our biggest discipline, it accounts for about 40% of our revenue; but also Sales, Financial Services, robust, Accounting & Finance and Procurement & Supply Chain. So the only thing we're seeing, I suppose, in North America is some pretty significant wage inflation now and also a very high level of buyback and counteroffer. So I mean, those are broadly positive signs. So the market in North America and in particular the U.S. remains strong, and there's no signs of that changing anytime soon. I think by contrast, in the U.K., it's just more of the same. We have a more junior end of the market in Page Personnel, which is very robust. We're very operationally strong there as well and that we find that the confidence of that end of the market remains good. Candidates prepared to move job, and clients are prepared to continue to invest in hiring at that end. It's a little bit more cautious in the Michael Page part of the market. And again, until things are sorted out with Brexit, we don't see that changing.

[Matthew Lloyd, Head of United Kingdom Small and Mid]

Okay. And one quick follow-up question. Are you -- when dealing with sort of other people's RPOs and MSPs in sort of large contracts volume discount models, are you still pushing a lot of candidates through that? Or do you feel that you just -- you don't really need to in this level of labor scarcity?

[Oliver Watson]

I think if you're referring to the more mature markets like the U.K., I think the amount of revenue that we now generate from engaging with RPOs is declining for the very reason that you just outlined, which is they are also under pressure to find candidates in what is an increasingly candidate-short market. And so, yes, the need to engage with the RPOs is there in the way that maybe it was a few years ago.

[Operator]

We now have a question from Anvesh Agrawal calling from Morgan Stanley.

[Anvesh Agrawal, Research Associate]

First of all, our good wishes with Steve. And just got one question on Australia. I mean, the growth remained strong but it has slowed down sequentially. Are you seeing anything in the market particularly? Or are there more company-specific issue, which is driving that growth down on a sequential basis? And what's your outlook there, please?

[Kelvin Stagg]

I think Australia was a bit slower. I think some of that is about comps. I think we've got a strong management team in Australia, possibly slightly weaker in Sydney and New South Wales along that side. But actually, outside of that, we've got a pretty good result. So we're very strong over in Perth. We've got good business in Brisbane. Our Melbourne office is moving along very strongly. So I don't think we're really seeing anything in terms of macros being a challenge. We had a record in Page Personnel. And actually, the contracting part of that business is growing very strongly. So we're about 55% of PP is now in contracting, and that particular part of it grew 44%. So it's a part of the business that's relatively small. It's relatively new, the Page Personnel part of the business. It's roughly about 25% of our Australian business, but it is one where we see that there is structural opportunity to grow. So no, I think outside of that, we're not really seeing much in terms of any sort of slowdown macro-wise in Australia. But then, we have very little exposure into construction or particularly in public sector. So our expectation for the rest of the year continue to be to grow. And we opened a new office in Canberra last year and that's also performing particularly well.

[Operator]

[Operator Instructions] We have no further questions registered, so I'll hand back to you, Kelvin.

[Kelvin Stagg]

Thank you. As there are no further questions, thank you all for joining us this morning. Our next update to the market will be our second quarter 2019 trading update on the 10th of July. Thank you all. Goodbye.

[Operator]

Ladies and gentlemen, that does conclude today's call. Thank you for joining. You may now disconnect your lines.